Chapter 9 3) The Specific-Factors Model (SFM). The Heckscher-Ohlin Assumption. It is important to understand that the H-O assumption of free factor mobility between industries describes a state at which an economy can arrive in the long run.
X = Fx (Rx, Lx)
Y = Fy (Sy, Ly) (9.1)
where Rx & Sy represent types of capital that are specific to sector X & Y.
R = Rx
S = Sy
L = Lx + Ly (9.2)
(a) an identical 5% rise in R & L
(b) an addition rise of 5% in R
MPLXPx = w
MPKXPx = r (9.3)
w/Px = MPLX
r/Px = MPKX
Example and explanation:
At constant commodity prices, any increase in the endowment of specific factor will increase the real returns to the mobile factor and lower the real returns to both specific factors.
Example and Explanation:
Increase in the endowment of the mobile factor will reduce its own real income & increase the real income of both specific factors.
Example & explanation: